Friday, December 23, 2011

Despite its geographical proximity, the Australian life insurance industry bears little resemblance to the other markets. It is well established, having matured over the past 15 years, and remains relatively small, with US$31.2 billion of sales in 2007. Australian insurers have not connected more with the rest of Asia due to a history of poor expansion outcomes and ongoing fears about regional fundamentals, including fallout from the Asian financial crisis of the late 1990s.Although there are few growth prospects remaining in Australia, we are cautiously optimistic about the future of the industry. In particular, there are opportunities to more effectively extract value from the risk and savings needs of Australian consumers. For example, there are many unmet risk management needs that must be addressed, such as longevity and morbidity risk, that have been opaquely transferred from government to individuals over the last 20 years or so.

An Introduction to Life Insurance and Retirement Savings in Australia

A fundamental aspect of the Australian life insurance and retirement savings market is the extent to which risk and savings products have been unbundled. Although there are some products that combine both elements, they are a small minority of the total business and tend to take the form of an investment product with guarantees rather than an insurance policy with investment attributes. Australia Life Insurance MarketThe superannuation (retirement savings) industry has a legislated mandate to provide retirement savings for all working Australians and provides the vast majority of the retirement and savings infrastructure. This legislated mandate has seen the superannuation industry grow to US$1,036 billion in assets by 2007, making Australia the fourth-largest assetmanagement market globally. Furthermore, there have been recent discussions about increasing mandated superannuation contributions (potentially up to 15 percent, from 9 percent today), which would drive growth for at least the next 10-15 years. By contrast, the domestic life insurance market languishes in its shadows with US$224 billion in assets. The Australian life insurance market is comprised of three very distinct segments:

Risk products: These include term-life, temporary and permanent disability, and business continuity insurance covering both individual and group business. Annual sales are around US$1.5 billion. There is a negligible amount of whole-life products sold in Australia.

Annuities: These are typically termed with residual, capital-value guarantees. There is a negligible volume of life annuities sold in Australia (around 1 percent). Annual sales are around US$6.0 billion.

Investment products: These include conventional, individual, and group investment accounts and investment-linked business. Annual sales are around US$23.8 billion.

Compared to the rest of Asia, the growth numbers here are weak; overall premium has grown at only 2 percent annually from 2002 to 2007. The only highlight has been that risk products grew by around 12 percent - although a large part of this growth has been driven by stepped premiums that carry their own risks. By comparison, annuities and investment products have shown little growth. In fact, annuities have yet to clearly demonstrate their value proposition against traditional, allocated pensions. Therefore, new sales have predominantly been in the term-annuity space with relatively few players offering guaranteed or lifetime annuities. Moreover, little product innovation has taken place in recent years.Despite their size in terms of sales, the annuity and investment segments are relatively modest profit contributors, as a percent of sales, compared to risk products. They are distributed in similar ways to the majority of asset-management and retirement products in Australia - via wholesale or independent retail distribution channels (that is, independent or tied financial-planning forces). Our focus is primarily on risk products.Distribution of individual risk products in Australia is primarily through aligned and nonaligned dealer groups. These groups include, for example, Commonwealth Bank Financial Planners, AMP, and Genesys Financial Advisors (now owned by AXA). However, many of the bank-owned life insurers are enhancing their cross-selling of insurance products through the bank channel to maximize the value of their proprietary distribution channels. This channel has grown relatively quickly in recent years as a result. Group risk product sales are mostly done via the "wholesale" channel. The wholesale channel covers premiums associated with stand-alone corporate, government sector, and industry superannuation group risk schemes.CommInsure (a subsidiary of the Commonwealth Bank of Australia), NAB/MLC (a subsidiary of the National Australia Bank), and ING Australia have leading positions in nearly all five products. A number of other players, notably Tower and AXA, have leading positions in specific products. Compared to other parts of Asia Pacific, the competitive dynamics in Australia has been much more stable. With the exception of a small number of acquisitions and joint ventures (for example, the acquisition of Asteron by Suncorp in March 2007 and the tie-up between ANZ and ING in 2002), this landscape has remained remarkably similar over the past several years.

The Development of the Australian Life Insurance IndustryThree major trends, each of which has been the result of government intervention, have shaped today's Australian life insurance and retirement savings landscape:

(i) the introduction of superannuation and the unbundling of risk and savings products; (ii) deregulation and the emergence of bancassurance models; and (iii) demutualization and changing business models.

The Introduction of Superannuation and the Unbundling of Risk and Savings Products

With the emergence of superannuation onto the Australian financial landscape, risk and savings products effectively became unbundied. Compared to the rest of Asia Pacific, where there is still significant opaqueness in product structures and, therefore, high embedded margins in life policies, Australia presents the opposite picture. Australia Life Insurance MarketTo understand this, one must appreciate a bit of history. Superannuation schemes were introduced in Australia after World War II as a way of providing for servicemen in retirement. During the 1960s, these schemes emerged as major competitors to the traditional savings and risk management products of life insurers. By the end of the 1960s, superannuation had taken over from traditional products as the way Australians thought about savings and retirement.

To address this new form of competition, Australian insurers responded through innovation in product design. In particular, during the 1970s, they started to unbundle traditional life insurance products into separate risk and savings products. There were a number of reasons for this. Unbundling produced products made them much easier for retail consumers to understand. The new products could then compete directly with those from the superannuation industry. Furthermore, it allowed investors the opportunity to better tailor their product portfolio and have greater control over decisions, such as where their funds were invested.Also, government intervention has completely changed the face of the insurance industry through concessionary tax treatments and the introductionof compulsory superannuation contributions in 1992. Compulsory superannuation quickly enlarged the size of the industry to such an extent that it is now a fundamental element in the Australian financial system. Many Asian governments have studied the superannuation scheme, and a few countries have actually put mandatory systems in place, such as the Central Provident Fund (CPF) in Singapore and the Mandatory Provident Fund (MPF) in Hong Kong. However, the extent to which superannuation took off in Australia and "crowded out" retail financial products is truly unique. None of the markets has anything dose to the 360-kilo gorilla that superannuation has become in Australia.

Next post we'll continue to talk about deregulation and the emergence of bancassurance models and demutualization and changing business models. At mean time, you can check out Australia Life Insurance Market for more details.